Donald Coxe – Investment Recommendations (February 2010)

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The February edition of Donald Coxe’s Basic Points research report (subtitled “Hard Rocks and Hard Shocks”) has just been published. His investment recommendations, as summarized in this document, are listed in the paragraphs below, but I do recommend you also read the full report at the bottom of the post. (Also note that Donald’s weekly webcasts can be accessed from the sidebar of the Investment Postcards site.)

1. This is assuredly an inopportune time to increase equity exposure – and an opportune time for profit-taking.

Major stock indices are breaking down. For the S&P, it would take only an 8% retrenchment from its current level to break the 200-Day Moving Average, and take the index to late summer levels.

2. Maintain a strong overweighting in commodity stocks within equity portfolios.

3. Maintain high exposure to gold bullion and the gold miners whose production comes from politically-secure areas.

The core belief system for gold is that governments can’t be trusted. Investing in miners dependent on the sustained honesty and wisdom of conspicuously dubious governments may work out for a time, but the principle behind that strategy is oxymoronic.

4. Investors should overweight base metal miners within the cyclical component of their equity portfolios.

The base metal miners’ earnings have come back faster than all but the most optimistic would have predicted when the world’s crisis managers were engaged in panic-driven ad hoc strategies to avert a Depression. Few investors grasped the significance of the fact that the new players on the global block – China and India – weren’t even in recession. Result: metal inventories never mounted to levels that would have imperiled major miners.

5. Here is a strategy for corporate clients to consider: borrow – don’t buy – debt denominated in euros.

The Eurozone, justly renowned for its liberal dispensations of pork, barely emerged from the Crash before being faced with a big PIIGS (Portugal, Ireland, Italy, Greece and Spain) problem. Germany has a veto on any form of bailout for the big spenders, and German voters were never given a chance to vote on whether they really wanted to swap their beloved Deutschemarks for euros. Canada recently demonstrated its smarts by borrowing heavily in euros.

6. The Saudi Oil Minister has said that $70-$80 is the “perfect” price for oil. In an imperfect world, this looks like a reasonable price for valuing oil producing companies – and the contango in the futures curve is a reasonable basis for valuing the companies’ Reserve Life Indices.

7. Underweight natural gas-related stocks within energy portfolios.

Overweight the oil sands companies, whose managements should be among the loudest of laughers at the warmists’ implosion.

Despite El Niño, it has been a challenging winter for most of the USA. But it hasn’t been enough to get natural gas prices up to interesting levels.

8. We remain bullish on the leading agricultural stocks.

Food price inflation is hitting consumers in many emerged and emerging economies. The reasons vary, but the Beijing bosses and their counterparts in other important economies have to be concerned that prices could be so strong, even though prices of corn, wheat, soybeans and rice are not.

9. Canadian bonds and stocks should be heavily overweighted in global portfolios.

As you watch the Vancouver Olympics, don’t focus too much on the Canadian committee’s high-risk decision to schedule many downhill events on the coast in what turned out, unfortunately, to be the year of a giant El Niño. Look at the beautiful city and countryside, and look at how Canada’s economy is performing compared with its Southern neighbor.

10. Overweight investment grade corporates in bond portfolios.

Would you rather hold long-term debt from a government that cannot manage its finances or from a great company that manages its money very well? Remember that those smart people who rate leading governments’ bonds AAA also gave that rating to trillions of face value in complex “bonds” that are heavily weighted in the worst of residential mortgages.

If the US stock market rolls over and falls sharply, the impact on the US economy is likely to be profound. Such improvements in consumer and business outlooks as the pollsters find are heavily based on the strong equity markets. Those ebullient markets helped corporations rebuild their finances through debt and equity issues. A bear that emerges from hibernation could be dangerous to more than equity investors.

The full report follows below. (Click on “Fullscreen” for readable version.)

Hard Rocks and Hard Shocks-BMOCM-02-2010

Source: Scribd, February 22, 2010.

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